Echo Entertainment open to foreign partners

Echo Entertainment chairman John O’Neill is not backing down from competition in Sydney with Crown Casino: ‘Some would argue that Crown’s a better casino in Melbourne, but we’re a better city.’
Photo: Louis Douvis

Echo Entertainment
is open to foreign and domestic partnerships to help fund its $1.1 billion Sydney casino proposal, chairman
John O’Neill
said as he downplayed the prospects of a near term equity raising.

“There’s always room for partners, domestic and international partners," Mr O’Neill told The Australian Financial Review, adding Echo would be keen to team up with an Asian casino group.

“Nothing’s in, nothing’s out – but a partnership with Malaysian hotel group
Genting
or another major casino operator in the region is always a possibility."

Genting, which is owned by Malaysian casino mogul K. T. Lim, last week increased its stake in Echo to 6.6 per cent from 5.22 per cent and Echo has been keen to court the group as a potential partner in the past. However, Genting is yet to comment on Echo and Mr O’Neill admitted that executives at his second largest shareholder “play their cards very close to their chest".

AFR
AFR

Echo said it had a memorandum of understanding with an undisclosed Asian hotel chain to operate a new five-star hotel as part of its unsolicited proposal to the NSW government to develop a resort at its Star casino.

No funding worries

Although the hotel would not necessarily take an equity stake in the project, Echo was “not excluding it", Mr O’Neill said. Echo is planning to fund the proposed resort, which would not be built until 2019 if approved by the state government, from existing cash flows and debt facilities.

The company has committed to nearly $2.5 billion in developments in Brisbane, the Gold Coast and Sydney, which is the same size as the company’s current market capitalisation.

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The group’s earnings before interest, taxation, depreciation and amortisation (EBITDA) in the first half of 2013 were $204 million, and it claims to have around $475 million available in debt facilities.

“We have no concern with our capacity to finance this project," said
John Redmond
, Echo’s chief executive.

Mr O’Neill backed Mr Redmond, arguing that while Echo was not ruling out an equity raising to help fund the project, it was “not ruling it in" either.

“We believe that our free cash flow and our banking facilities provide us with the capacity and the capability to complete the project."

Matt Williams, head of equities at
Perpetual Investments
, Echo’s largest shareholder with a stake of more than 12 per cent, told Financial Review Sunday the investment group would back an equity raising at Echo if necessary.

Mr Williams also suggested Echo could sell some of its Queensland casinos to help fund the development, although Mr Redmond said asset sales were not under consideration.

New Zealand gaming company SkyCity is a potential bidder for the Queensland assets.

Echo’s three Queensland casinos are not performing as well as its Sydney Star casino, with EBITDA dropping 14.3 per cent in the first half to $73.1 million, compared to a 7 per cent rise in EBITDA at Star to $140.7 million.

Echo says it is committed to developing a new casino in Brisbane as well as the proposed Sydney resort, with the $1 billion Brisbane development not expected to start until at least 2016.

Exclusive licence war with Crown

Echo will also be on the hook for a $250 million payment to the NSW government if the state agrees to extend its existing exclusive license in Sydney beyond November 2019 for a further 15 years.

The company argues an extension of its exclusive license will make it more willing to invest money in Star’s dev­elopment.

“These assets need constant capital spending, and your appetite to invest is greatly enhanced if you’re the only game in town," Mr O’Neill said.

Although Echo is still prepared to do the proposed development if it doesn’t get an extension on its exclusive operating license, it won’t go ahead with the development if the state government allows Crown to build a full scale casino.

“Only if it is limited to the VIP business are we willing to make the investments we are talking about," Mr Redmond said.

Citigroup analysts say Echo’s balance sheet is strong enough to complete both the proposed Sydney and Brisbane developments, given the investments will be gradual.

Echo expects it will take at least two years to win planning approvals if the development proposal gets the green light from the government.

But Citigroup says Echo faces an earnings hit of more than $50 million if Crown’s proposed development goes ahead because some of the local punters who now go to Star will go to Crown’s casino instead.

Both Crown and Echo are hoping to attract more international customers, with Sydney currently attracting less high-spending VIP customers than Melbourne despite having more Asian tourists.

“The middle market of Asia is on the move and our plan is not just to integrate [the proposed resort] with Sydney but also with the tourism plan," Mr O’Neill said, adding Sydney was the “gateway" to Australia.

“Some would argue that Crown’s a better casino in Melbourne, but we’re a better city."